Carrying a balance won’t help your scores

Dear Liz: I question your advice to the father whose son was turned down for a car loan. You told the father: “Your children don’t need to take on debt to build their credit histories. A couple of credit cards, used lightly but regularly and paid off in full every month, will do the job.”

Recently I was on the phone with a credit bureau questioning an item on my credit report. I have always paid off my credit card balance every month. The credit bureau representative told me that my credit score would be higher if I paid less than the full balance owed on my credit card every month. I asked her how it could possibly hurt my credit score by paying what I owe each month on a timely basis. She assured me that it does hurt my score. I still don’t understand it, but after I read your piece I thought I would pass on to you the advice I received from this credit bureau representative.

Answer: Just because someone works at a credit bureau’s customer service center does not mean she understands how credit scores work.

The information she gave you was dead wrong. She’s not only incorrect about how credit scoring works, but she seems unclear about how credit information is actually reported to her bureau.

The credit card balances that lenders report to the bureaus don’t reflect whether you pay your debt in full. The credit card issuers report the balance on a given day each month. Typically, but not always, it’s the balance from your last statement. You could pay the full amount the day you get your bill, or pay only the minimum. The credit bureaus would never know.

The leading credit scoring formula, the FICO, uses the balances that are reported to the bureaus to calculate your credit utilization. Since neither the bureaus nor the scoring formula “know” whether you pay that balance in full or not, there’s no advantage to carrying a balance. It doesn’t help your credit; it just costs you money. That’s also why it’s important to limit how much of your credit you use at any given time, since maxing out your cards can hurt your scores, even if you pay the balance in full.

“There is no reason to carry a balance to improve your score,” said Anthony A. Sprauve, public relations director for myFico.com, the only place where people can buy their FICO scores. “If someone is paying all of their bills on time; keeping their credit card balances low or at zero; and not opening new lines of credit, they are doing the three most important things they can to have a good credit score.”